Commentary: Resolving One Debate on Public Sector Pay

Washington Post columnist Sasha Volokh asks, “Are public-sector employees ‘overpaid’?” Even if there were one single answer – and there isn’t, because not every public employee is the same – it would be tough to answer the question in a single column.

However, we can straighten out a couple of things. Volokh quotes at length a New York Times discussion of retiree health benefits, which cites my own work and a response from Rutgers professor Jeffrey Keefe:

Finally, much of the debate relies on elusive accounting. Ultimately, the argument turns on things that are difficult to value, especially retirement benefits. Most public employees are guaranteed a pension and have access to retirement health insurance – benefits that are disappearing from the private sector. What is this worth?

A lot more than federal surveys show, said Andrew G. Biggs of the American Enterprise Institute, because state and local governments are putting away far less than they should to finance their obligations, especially in some heavily unionized states. But Jeffrey H. Keefe, a Rutgers professor who studies the issue for the liberal Economic Policy Institute, disputes this and argues that the cost of defined benefit pensions is overestimated in federal surveys.

Mr. Biggs argues that public retiree health care is also underestimated. He says that the value of that is huge and pushes public workers’ compensation well above private workers’. Mr. Keefe cites California, where less than 1 percent of state employee retirement spending goes for this purpose. The debate goes on.

Sure, this can be confusing. But the debate shouldn’t go on that long.

Now, Keefe’s estimate that retiree health benefits are worth about an extra 1% of wages for California employees is better than nothing. I state this only because, prior to Jason Richwine and me pointing out that retiree health benefits need to be counted, nothing is what Keefe’s EPI reports credited for retiree health care.

Nevertheless, Keefe makes two mistakes: first, he divides the retiree health benefits paid to today’s retirees by the wages of today’s employees. That’s wrong, since they’re not the same people. And if retiree health benefits are growing faster than wages, which they are, Keefe’s method will underestimate them.

Second, Keefe divides the value of retiree health benefits paid to today’s California state employees by the wages of California’s state and local employees. But California’s local employees have their own retiree health benefits, which Keefe doesn’t include.

Luckily, California and other public employers are required to calculate and disclose what’s called the “normal cost,” which represents the value of the future retiree health benefits accruing to employees today. California’s actuaries calculate that in 2011 state employees earned around $2.2 billion in future retiree health benefits and their total wages were around $18.01 billion. So those benefits are worth around an extra 12% in wages. This is compensation that private sector workers rarely receive. And–perhaps more importantly–can’t really understand as they debate how to set public employee pay.

And California is hardly the most generous state when it comes to retiree health benefits, or to total public sector pay.

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